Bradley
Doucet is a writer living in Montreal. He has studied
philosophy and economics, and is currently completing a novel on
the pursuit of happiness. He also is QL's English Editor.

GOING HUNGRY: WHY BIOFUELS ARE BAD
FOR PEOPLE, PROSPERITY, AND THE PLANET

by Bradley Doucet

I suppose it must have seemed like a good idea at the
time, at least from a certain perspective. Global
warming, one story goes, is a dire threat to humanity's
survival – to the survival of the very planet, even –
and global warming is driven by increasing
concentrations of carbon dioxide in the atmosphere
caused by the burning of fossil fuels like coal, oil,
and natural gas. A second story has it that global oil
reserves have peaked and we will soon be running out of
our precious black gold. According to yet a third story,
while there may be plenty of oil, much of it is
inconveniently located beneath land ruled by autocratic,
antagonistic regimes.

Whether to stave off global warming, replace dwindling
oil supplies, or achieve energy independence, all three
of these stories argue for the development of
alternative sources of energy. In addition to old
standbys like solar, wind, hydro, and nuclear power,
another player has lately taken up a prominent position
on the stage: biofuels, which are produced from recently
dead biological matter (basically, plants), as opposed
to fossil fuels, which come from long dead biological
matter.

According to a recent
Time magazine cover story, "The
Clean Energy Scam" by Michael Grunwald, biofuels
such as ethanol have become "the trendy way for
politicians and corporations to show they're serious
about finding alternative sources of energy and in the
process slowing global warming." As the title of
Grunwald's article suggests, however, all is not as it
seems. Biofuels, it turns out, are bad for people, bad
for prosperity, and bad for the planet.

Going Hungry

We are, by all accounts, in the midst of a global food
crisis. "A wave of food-price inflation is moving
through the world, leaving riots and shaken governments
in its wake," says a piece in
the April 19 edition of The Economist. In the
last 12 months, the price of corn has risen 50%, wheat
75%, and rice nearly 200% (see "The
New Face of Hunger"). The president of the World
Bank figures that 100 million people are in danger of
being forced into poverty by the soaring cost of food.
UN Secretary General Ban Ki-moon met with key
development agencies in Switzerland at the end of April
to discuss what to do about the problem.

The current crisis is not
one of supply – there have been no massive, widespread
harvest failures – but rather of demand. One might well
imagine that as millions become richer in places like
China and India, they are exerting upward pressure on
food prices by eating more. In fact, though this is
happening, it is happening only gradually. The high
price of oil is also having an overall inflationary
effect, as is the U.S. Federal Reserve's loosening of
the money supply in reaction to the subprime lending
fiasco. But the real culprit behind the recent rapid
upswing in food prices, according to The Economist, is
"the sudden, voracious appetites of western biofuels
programmes, which convert cereals into fuel."

Diverting crops like corn
to ethanol refineries increases the demand for corn,
which raises the price of corn. This in turn causes some
farmers to shift fields to corn production, and some
consumers to substitute away from corn, both of which
raise the prices of other staples. Jean Ziegler, an
independent food expert at the UN,
told the recent Swiss conference that "biofuels, as
they are produced at present, constitute 'a crime
against a large part of humanity.'" He was not alone in
singling out biofuels. Also at the conference, Céline
Charvériat, Oxfam International's deputy advocacy
director, said that biofuels are "a major cause of
increasing prices" and called on rich countries to end
their biofuels mandates.

Burning Money

But if consumers in rich countries want biofuels, then
that's what they want, and markets will just have to
adjust, right? Except that it's not consumers who are
choosing to use biofuels in a free market – it's
governments that are pushing biofuels on consumers with
market-distorting mandates and subsidies. According to
an article by Robert Bryce published in Slate
in 2005, subsidizing ethanol "has cost American
taxpayers billions of dollars during the last three
decades, with little to show for it. It also shovels yet
more federal cash on the single most subsidized crop in
America, corn. Between 1995 and 2003, federal corn
subsidies totaled $37.3 billion." Things have only gone
from bad to worse since then, as mandates and subsidies
for ethanol have been ratcheted up dramatically.

Take away those
subsidies, and even with the current high price of oil,
nobody but the most fervent environmentalist is buying
ethanol. Subsidies by their very nature take money from
taxpayers and spend it on things the taxpayers would not
have spent it on – either that, or they do nothing at
all and are completely pointless. If ethanol is a way to
address global warming, replace dwindling oil supplies,
or achieve energy independence, then people either value
these goals highly enough to pay the difference at the
pump or they don't. Forcing those who don't to act
against their values through tax-funded subsidies is
like burning money.

"If ethanol is a way to
address global warming, replace dwindling oil supplies,
or achieve energy independence, then people either value
these goals highly enough to pay the difference at the
pump or they don't."

One reason some people think the
government knows how to spend your money
better than you do is the existence of
negative externalities. If global
warming, for instance, really is the
catastrophe some fear it is, it
represents a negative externality, a
cost that is not borne by the consumer
of oil but by the population at large.
Since this cost is diffuse, it is
difficult to address through the simple
enforcement of property rights. Many
argue that governments are justified in
intervening in markets to correct
negative externalities. (For an
alternate, skeptical take on this line
of thinking, see Jean-Louis Caccomo's
article
in last month's issue of Le
Québécois Libre.)

But even if we were to
accept that global warming is a big
problem and that government should
intervene, it is hard to imagine a worse
way of intervening than subsidies to
producers. How is the government to
choose which alternative energy
technologies to encourage? In practice,
powerful lobbies determine where the
money goes. If intervene we must – and
it is far from clear that we must – far
better to tax the negative externality
or establish a cap-and-trade system and
let entrepreneurs compete to find the
best solution. Centralizing these
decisions in government does not work,
because governments do not know the best
solution. In fact, no one starts off
knowing the best solution to any problem,
and competition is the only way of
finding it out. One thing is clear: of
all the possible alternative energy
technologies governments could have
chosen to encourage, biofuels were
probably the worst.

Cutting
Down Trees

In addition to raising food prices, to
the detriment of the poorest denizens of
the planet, and frittering away billions
of dollars of tax money, it is becoming
increasingly evident that pushing
biofuels does nothing to address the
alleged problems of global warming, peak
oil, or energy dependence. Even back in
2005, according to Bryce's Slate
article, critics were charging that "making
ethanol from corn requires 29 percent
more fossil energy than the ethanol fuel
itself actually contains." Bryce
concludes, "What frustrates critics is
that there are sensible ways to reduce
our motor-fuel use and bolster renewable
energy – they just don't help the corn
lobby." Instead of wasting billions of
dollars on ethanol, Bryce argues, we
could spend it on fuel-efficient cars
and solar cells, which would at least
give us something for our hard-earned
cash.

But it gets worse.
According to Grunwald's Time
magazine cover story, biofuels are
contributing to the deforestation of the
Amazon rainforest. The chain of
unintended consequences is as follows:
1) subsidies for biofuels lead some U.S.
soybean farmers to switch to corn; 2)
fewer soybeans lead to higher soybean
prices; 3) higher soybean prices lead
Brazilian soybean farmers to expand,
displacing cattle ranchers; and 4)
cattle ranchers clear new pastures out
of the Amazon. Of course, since plant
matter stores carbon, cutting down more
of the Amazon releases yet more carbon
into the atmosphere, making ethanol an
even more self-defeating solution to
global warming than it already was.

In short, the
environmentalist movement has done it
again. In a misguided effort to "save
the planet" by lobbying for the full
force of government to be brought to
bear on this alleged problem, they have
contributed to an increase in human
suffering, just like they did with their
successful efforts to ban DDT. This time
around, in an effort to stave off global
warming and the end of oil (and with an
assist from energy independence
enthusiasts and the corn lobby), they
have driven up the cost of food, leading
many to go hungry; they have sucked more
money from the public trough, leading to
slower economic growth; and they have
caused more, not less, carbon dioxide to
be released into the atmosphere, in part
by pushing ranchers into clearing away
more of the Amazon rainforest.

What now?

Left to its own devices, a free market
would adjust to the new conditions
brought about by our recent irrational
obsession with biofuels. Agricultural
markets adjust less quickly than some
other markets, but they do adjust. Given
the chance, farmers invest in greater
productive capacity and meet the higher
demand, reaping the rewards but also
bringing prices back down to a more
reasonable level.

Unfortunately, the global
agricultural market is far from free. In
fact, it remains one of the most heavily-protected
areas of the global economy, an anomaly
that the stalled Doha trade talks are
intended to address. Thanks to decades
of prior interventions including price
supports and market access restrictions
in rich countries (not to mention a lack
of secure property rights in poorer
countries), farmers in much of Africa
especially have underinvested in
agriculture for many years, and so will
be slower to take advantage of, and help
alleviate, higher prices.

To make matters even
worse, governments around the world are
reacting to the food crisis in all-too-typical
ways, attempting to correct the
unintended negative consequences of
prior interventions with yet more
intervention. Says The Economist,
"Of 58 countries whose reactions are
tracked by the World Bank, 48 have
imposed price controls, consumer
subsidies, export restrictions or lower
tariffs." Only the last of these, lower
tariffs, which represent less
intervention, will help ease the
situation in the long run. The other
three are classic instances of
intervention, and will only serve to
delay the much-needed adjustment of the
market.

What would have happened
if agricultural markets were really
free? Rich countries would not have
protected their domestic markets for
decades, and farmers in poor countries
would have enjoyed secure property
rights, both of which would have
encouraged those farmers to invest more
over the years. This would have allowed
them to raise their standard of living,
and also would have given them the
ability to react far more quickly to the
current crisis. There would be no
resorting to short-term fixes like price
controls, consumer subsidies, or export
restrictions, which only prolong the
problem. And finally, tariffs would not
need to be lowered, because they would
not exist. Of course, in a truly free
market, there would be no subsidies to
ethanol producers, and so the current
food crisis would never have become as
severe as it has today.